Startup Legal Tips: Hidden Pitfalls of a Partnership

December 3, 2009

9:28 pm

So last week we dove head first into the topic of just how to start your new company. This week I wanted to share with you some great information I came across in a post about some pitfalls to think about before you start a partnership. It was stuff I had never thought about before.

Last weeks basic advice was to get solid legal advice and make sure you do a lot of planning up front so as not to run into problems in the future, especially when starting the business with others. What I did not think about was what the post called “The 3 D’s”:  death, disability, divorce.  Have you ever thought of what will happen if your partner dies ?  How about becomes disabled ?  Even better (or worse) divorced.  It can be a tricky landscape in any situation.  For instance, imagine your partner dies and there is nothing written about what happens to his/her share of the business.  All of the sudden you just became partners with their spouse.

Here are the four things the post prescribes to make sure you have all your bases covered

Step one: If something happened to your partner and you are buying shares from him/her, is your partner a family member? Or a professional colleague or friend? The I.R.S. cares. If it’s a family member, they assume that your deal is “cooked” and your numbers are not based on fair market value. If it’s not a family member, they will scrutinize less.

Step two: Lay out the scenarios for each of the different possibilities. What happens in the event of a death? Divorce? Disability? Bankruptcy? Voluntary retirement?

Step three: What’s the formula for determining the fair market value of the shares?

Step four: What are the different ways you might pay your ex-partner in each of these events? A loan from the company? A life or disability insurance policy? And is the buyout required? Or is it optional?

So take a look and if you are in the process, or about to start up a partnership, apply these rules.  Heck even if you are already in one, it would be best to read these and apply the lessons to your partnership agreement to avoid any issues in the future.

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Jimmy Gardner is a Senior Unix/Windows Engineer, a lover of technology and photography. Follow him online at @jjgardner3 and enjoy his portfolio at

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